Beruflich Dokumente
Kultur Dokumente
ri rf i (rM rf )
beta
Expected
CF next
year
Accept or reject
1.21
140$
20.2$
Accept
1.21
120$
3$
Accept
1.21
110$
-5.6$
Reject
NPVA 100
140
20.2$
1.16495
T
NPV C0
t 1
Ct
(1 r ) t
3
Determinants of beta
Beta is determined by the characteristics of the
firm:
Cyclical nature of revenues
Operating leverage
Financial leverage
Cyclicality of revenues:
If firms sales are largerly dependent on the
market cycle, beta will be high.
Operating leverage:
It is defined as
EBIT sales
EBIT sales
Determinants of beta
Financial leverage:
It is the extent to which a firm relies on debt
Since a levered firm must make interest payments
regardless of its sales, financial leverage is the firms fixed
cost of finance
asset equity
Because equity/(debt+equity)
for a levered firm is below
1, it follows that
equity asset (1
debt
)
equity
Determinants of beta
Ex. Rapid C. is currently all equity and has a asset
beta of 0.8. It has decided to move to a capital
structure of debt (1) and equity (2). Since the firm is
staying in the same industry, its asset beta keeps
0.8. Assuming a zero beta for debt, which is its equity
beta?
1
rWACC
E
D
rE
rD
ED
ED
rWACC
E
D
rE
rD (1 Tc )
ED
ED
Cost of debt after
corporate tax
rWACC
40
60
9.9%
24.40% 18.60%
100
100
12
12
..
6.07$
(1 rWACC )
(1 rWACC ) 6
10